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Drug Shortages on Upswing

Americans are getting a hard dose of where removing the profit incentive from health care eventually leads.

According to a new report, medical facilities face an increasing shortage of important, and often life-saving, medications. While drug shortages are not uncommon, the number of them has tripled in the last five years, reaching a record number of 211 drugs in short supply in 2010. This year is no different, as another 89 drug shortages have occurred in the first three months of 2011, according to the University of Utah's Drug Information Service which monitors shortages for the American Society of Health-System Pharmacists. What drives such shortages? Americans are getting a hard dose, if you'll pardon the expression, of where removing the profit incentive from healthcare eventually leads.

The first clue is provided by Cynthia Reilly, director of practice development with the society of pharmacists, who contends the principal reason for drug shortages is the consolidation of drug manufacturers. "Manufacturers will tell you they will never discontinue a drug because it's not profitable," she said, even as she noted that some drugs may be prioritized over others when such mergers occur. "Are there financial factors? I would say yes," she added.

Echoing that reality was Valerie Jensen, who heads the Food and Drug Administration's shortage office. She agrees that the overarching problem is fewer and fewer manufacturers producing medication, including older and cheaper generic drugs, especially injectable ones, which are harder to produce. Thus, if a company has difficulty making a drug, or decides to quit producing one altogether, there are fewer and fewer companies who can step in and fill the gap.

Injectable drugs constitute the vast majority of drugs used by medical centers in emergency rooms, Intensive Care Units and cancer wards, where shortages can last for as long as months, and where alternative medications are less-than-satisfactory substitutes for the real thing. How acute is the problem? "It's just a matter of time now before we call for a drug that we need to save a patient's life and we find out there isn't any," says Dr. Eric Lavonas of the American College of Emergency Physicians.

Yet even as these shortages persist, experts reveal reality regarding profit: pricier, brand-name drugs are seldom in short supply. In other words, drug companies do in fact consider "financial factors" when they "prioritize" the manufacture of some drugs over others.

For many Americans, especially those of the progressive persuasion, this reality constitutes all the proof they need that drug companies are inherently evil. Yet why do drug companies merge with one another or prioritize the production of certain drugs? Consider the case of Pfizer. From 2001-2009, Pfizer spent $60 billion on Research and Development (R&D) of new medicines, but failed to produce a single drug from its own labs which generated annual sales of $1 billion. Pfizer, along with another industry giant, Merck, have also lost patent protections on a number of so-called blockbuster drugs that make up for such revenue losses. Once such drugs become "generic," they move to companies willing to sell them for far less, undercutting critical revenue sources for the original producer even as company officials admit they cannot come up with new drugs fast enough to replace the ones that go off patent. Thus, in order to save costs, from the beginning of the recession through 2010, both companies cut 30,000 and 20,000 employees respectively. When employee cuts and mergers take place, what suffers most? R&D, which analysts estimate is two fifths less productive than it was ten years ago.

The loss of patent protection, however, which varies in length of time from drug to drug, is characterized as a win for the consumer. This is undoubtedly true. But at the same time, the loss of billions by the companies which created the drugs in the first place constitutes a disincentive to continue spending billions of dollars in R&D to produce new ones. Thus, fewer new life-saving drugs will be produced in the future.

Another factor in the drug shortage is the result of what happens to drug manufacturing per se when government regulation becomes too onerous. Regulatory and environmental costs (coupled with cheaper labor and construction costs as well) have driven drug manufacturing overseas, mostly to Asia where they can be produced more cheaply. In fact, critical ingredients for most antibiotics are made almost exclusively in China and India. Foreign production makes drugs much more vulnerable to supply disruptions, which produce shortages. Adding to the disincentive to produce drugs domestically is the fact that the F.D.A. inspections of drug factories occur at a far greater rate for domestic plants than foreign ones, something Joe Acker, president of the Synthetic Organic Chemical Manufacturers Association, characterizes as "totally backwards." Yet such backwardness remains in place.

And then there is the factor that managed to elude Democrats even as they produced 2700 pages of ObamaCare: tort reform was completely omitted from the bill. While litigation is a necessary evil with respect to protecting consumers from bad drugs, much like patent expirations and the elimination of R&D departments, it is a double-edged sword. For example, one of the primary drugs used for anesthesia is propofol. At one point, it was made by three companies. On May 11, one of those companies, Teva, was held liable for $365 million in damages when a Las Vegas clinic infected a patient with Hepatitis C from a re-used vial of propofol in 2008. The company had nothing to do with the clinic's unsafe practices, but apparently that was irrelevant to the jury.

As a result, Teva no longer manufactures propofol. Now there is a shortage of the drug, forcing doctors to seek alternative sources for medication. This leads directly to another problem: chronic shortages of key medicines increase the risk of drug errors as hospital pharmacies often turn to outside pharmacies, drug distributors, or a "gray market" of small distributors to get replacement medications. A survey of 1800 healthcare providers conducted last fall by Institute for Safe Medication Practices revealed at least 1,000 medication errors related to drug shortages. Furthermore, many of these gray market drug suppliers are are taking advantage of the shortages and driving prices through the roof.

Nyack Hospital Pharmacy Director Joseph Pinto is concerned that the shortage is so acute that hospital pharmacists might have to go back to making their own drugs from raw ingredients. "It isn't always the best practice. We are not always equipped," he said. "It's cumbersome, and it's manpower hours," he added. Thomas Magaldi, pharmacy administrator at Sound Shore Medical Center in New Rochelle, noted that numerous recalls, which occur when a drug is defective or potentially harmful, have also disrupted the availability of dozens of drugs in recent years.

Yet Mr. Magaldi said something that illuminates the essence of progressive thinking, and in doing so, provides the final clue as to where reducing the profit incentive for drug companies leads. If a company stops making a drug or there is a recall, he argued, the federal government should step in to compel other manufacturers to fill the gap. That is nothing more than government coercion. If such coercion sounds familiar, that's because it is the essence of ObamaCare, which cannot survive without compelling individual Americans to purchase health insurance, or pay a fine for refusing to do so.

Meanwhile, drug companies are reporting their biggest drop in profits in four years, and firms such as Pfizer, Merck & Co. and Bristol Myers Squibb Co. are "eliminating jobs, cutting costs and shedding business units to prepare for patent expirations." Les Funtleyder, a New York-based fund manager at Miller Tabak & Co., explained such a reality “in is pipelines and corporate transactions--either acquisitions or divestitures" are "going to dominate [drug company] discussions.”

In other words, most of what is causing current drug shortages will continue to occur. As for those who contend drug company profits are "obscene," here is a chart of the top 12 companies. Note the highest position of any drug manufacturer in the Fortune 500 is number 31, and that most of the twelve largest companies have seen considerable drops in profit from 2009 to 2010.

Yet if Americans still want to demonize drug manufacturers they are free to make that choice -- the same free choice which also extends to any company that wants to stop manufacturing anything they consider unprofitable. That is what freedom and free-market capitalism is all about. Does such a system have its flaws? Unquestionably, but that isn't the ultimate question. The ultimate question is how does it stack up against a socialist-inspired system epitomized in ObamaCare, in which profits are considered unseemly compared to societal "well-being."

An increasing level of drug shortages ought to provide the answer to that question. But drug shortages are only the the first wake-up call for a healthcare system in which Democrats are doing their best to demonize the incentive of profits. If Americans don't wise up, they may learn the same brutal lesson with respect to the rest of their healthcare that they are currently experiencing with regard to drugs: disincentives produce shortages. And such shortages make the "right" to healthcare meaningless.

Arnold Ahlert is a contributing columnist to the conservative website JewishWorldReview.com.